[Federal Register Volume 65, Number 139 (Wednesday, July 19, 2000)]
[Notices]
[Pages 44844-44846]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-18233]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43029; File No. SR-OCC-00-02]


Self-Regulatory Organizations; Options Clearing Corporation; 
Notice of Filing of a Proposed Rule Change Relating to OCC Clearing 
Members Pledging Long Options Positions

July 12, 2000.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

[[Page 44845]]

(``Exchange Act''),\1\ notice is hereby given that on March 6, 2000, 
The Options Clearing Corporation (``OCC'') filed with the Securities 
and Exchange Commission (``Commission'') the proposed rule change as 
described in Items I, II, and III below, which items have been prepared 
primarily by OCC. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested parties.
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    \1\ 15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The proposed rule change would allow OCC to expand the categories 
of accounts from which a clearing member can pledge long option 
positions and the categories of permitted pledgees.\2\
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    \2\ The complete text of the proposed rule change is included in 
OCC's filing, which is available for inspection and copying at the 
Commission's public reference room and through OCC.
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II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, OCC included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. OCC has prepared summaries, set forth in sections (A), 
(B), and (C) below, of the most significant aspects of such 
statements.\3\
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    \3\ The Commission has modified the text of the summaries 
prepared by OCC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    The purpose of the proposed rule change is to expand the categories 
of accounts from which clearing members may pledge long option 
positions to third party lenders and to expand the categories of 
permitted pledgees. The proposed rule change is intended to reflect 
liberalizing amendments to Regulation T (12 CFR part 220) and 
Regulation U (12 CFR part 221) made by the Board of Governors of the 
Federal Reserve System (``Fed Board'').
    Options have traditionally had no loan value under the Fed Board's 
margin regulations. The Only relevant exception was for ``special 
purpose credit'' extended to broker-dealers.\4\ A bank or another 
broker-dealer could extend credit on long options carried for the 
account of market makers and specialists to secure credit for financing 
their market making functions. Accordingly, when OCC adopted Rule 614, 
which allowed long options to be pledged to a bank or another broker-
dealer, OCC specified that options could only be pledged from clearing 
members' market-maker and specialist accounts.\5\ In addition, the 
permitted pledgees under Rule 614 were limited to banks and broker-
dealers as these were the only categories of lenders from which a 
broker-dealer such as a clearing member or market maker was permitted 
to borrow.\6\
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    \4\ Long options may also be given value in a customer's margin 
account when used to offset margin otherwise required on short 
option positions and are in turn given margin credit in the clearing 
member's account at OCC. However, that use of long option value does 
not involve the pledging of options to third party lenders, and Rule 
614 therefore has no application to such use.
    \5\ In recognition of the ability of a clearing member to pledge 
long options to a commodity clearing organization for the purpose of 
securing obligations to such clearing organization on related 
futures and futures option contracts, OCC later amended Rule 614 to 
permit this particular form of pledge. In 1999, OCC also amended its 
rules to permit pledging of long positions to third party lenders 
from a non-proprietary cross-margining account. Securities Exchange 
Act Rel. No. 41883 (September 17, 1999), 64 FR 51819 (September 24, 
1999).
    \6\ As noted in the footnote above, the rule was later amended 
to permit pledging of long options to a commodity clearing 
organization.
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    In 1996, the Fed Board eliminated the general prohibition against 
extending credit on long options and instead deferred to the rules of 
the options exchanges regarding option loan value by incorporating 
those rules by reference into Regulation T. \7\ Although exchange 
margin rules then in effect also prohibited extensions of credit 
against long options, these rules have subsequently been amended to 
permit broker-dealers to extend credit on certain long option positions 
in a customer margin account. \8\
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    \7\ Fed Board Release, 61 FR 20385 (May 6, 1996).
    \8\ E.G., Securities Exchange Act Rel. Nos. 41658 (July 27, 
1999), 64 FR 42736 (August 5, 1999) [SR-CBOE-97-67] and 42011 
(October 14, 1999), 64 FR 57172 (October 22, 1999) [SR-NYSE-99-03].
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    In 1998, the Board amended the Supplement to Regulation U to allow 
lenders other than broker-dealers to extend 50 percent loan value 
against all long positions in listed options.\9\ The Fed Board also 
modified the margin regulations to reflect amendments to the Exchange 
Act. The National Securities Markets Improvement Act of 1996 
(``NSMIA'') repealed section 8(a) of the Exchange Act which, among 
other things, had prohibited broker-dealers from obtaining credit 
against the collateral of exchange-traded equity securities from 
lenders other than broker-dealers and certain banks. For that reason, 
the Fed Board deleted provisions of Regulations T and U that 
implemented section 8(a) of the Exchange Act.
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    \9\ Fed Board Release, 63 FR 2806 (January 16, 1998).
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    As a result of all of the foregoing statutory and regulatory 
changes, credit may now be extended by broker-dealers, banks and other 
lenders against long option positions whether carried for the account 
of a market-maker or specialist, another broker-dealer, a public 
customer, or for the clearing member's own proprietary account. This 
renders the provisions of Rule 614, restricting the types of OCC 
accounts from which long options may be pledged and the kinds of 
entities that may be pledgees, obsolete. In recognition of this fact, 
OCC now proposes to amend Rule 614 to delete the obsolete restrictions.
    Of course, Regulations T and U continue to impose certain 
restrictions on extensions of credit secured by OCC-issued options. For 
example, the 50 percent loan limit would generally be applicable, with 
certain exceptions such as when the credit is extended to an ``exempted 
borrower.'' \10\ As is the case with other securities credit 
transactions, lenders and borrowers who use the OCC pledge program are 
obligated to comply with the Fed Board's margin regulations.
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    \10\ Exempted borrower is defined in Section 220.2 of Regulation 
T and in Section 221.2 of Regulation U.
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    OCC is also proposing to make certain technical amendments to Rule 
614. These reflect, among other things, revisions to section 8 and 9 of 
the Uniform Commercial Code adopted since Rule 614 was originally 
drafted. Conforming changes are being made to Rules 601, 602, 1105, and 
1106.
    OCC believes that the proposed rule change is consistent with the 
requirements of the Section 17A of the Exchange Act \11\ and the rules 
and regulations thereunder because it increases the ability of clearing 
members and their customers to arrange for or maintain financing for 
their positions while maintaining OCC's overall protection against 
default.
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    \11\ 15 U.S.C. 78-1.
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    OCC does not believe that the proposed rule change would impose any 
burden on competition.

[[Page 44846]]

(C) Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received From Members, Participants or Others

    Written comments were not and are not intended to be solicited with 
respect to the proposed rule change, and none have been received.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Within thirty-five days of the date of publication of this notice 
in the Federal Register or within such longer period (i) as the 
Commission may designate up to ninety days of such date if it finds 
such longer period to be appropriate and publishes its reasons for so 
finding or
    (ii) as to which OCC consents, the Commission will:
    (A) By order approve such proposed rule change or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Exchange Act. Persons making written 
submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, NW., Washington, 
DC 20549-0609. Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Section, 450 Fifth Street, 
NW., Washington, DC 20549. Copies of such filing also will be available 
for inspection and copying at the principal office of OCC.
    All submissions should refer to File No. SR-OCC-00-02 and should be 
submitted by August 11, 2000.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-18233 Filed 7-18-00; 8:45 am]
BILLING CODE 8010-01-M